19. Registration and incorporation Flashcards
- Registration and incorporation
General overview
[19.01] This section codified the common law attributes of incorporation of a company under subsection (5). Chief amongst these attributes are the separate legal personality of a company from its incorporators and the limited liability of these incorporators which may be open to abuse by fraudsters to the detriment of creditors of the company. Hence, there are devices at common law to “lift the corporate veil” to make the incorporators personally liable for the debts of the company and also under ss 339 and 340 of the Act.
Procedural requirements
- need to state the “last day of the proposed company’s first financial year” and such other information as may be prescribed. Basically, this new requirement makes the registrant(s) focus on planning the first year of business of the proposed company, and might discourage the current practice of incorporating shelf companies.
[19.02] The procedural requirements have been kept simple to facilitate the incorporation of a company under the Act: s 19(1). These days, registration of a company can be effected online through the website of ACRA. Act No 15 of 2017 amended subsection (b) by requiring the registrant to state the “last day of the proposed company’s first financial year” and such other information as may be prescribed. Basically, this new requirement makes the registrant(s) focus on planning the first year of business of the proposed company, and might discourage the current practice of incorporating shelf companies.
Common seal
[19.03] The word “common seal” is deleted in subsection (5). Refer to the new s 41A which provides that a company may have a common seal but need not have one.
Effect of incorporation
[19.04] Under s 19(5), the incorporation of a company has the following effect:
(a) the company is a body corporate with the powers of an incorporated company;
(b) it may sue and be sued in its own name;
(c) it has perpetual succession;
(d) it may own land; and
(e) the liability of the members is limited in the event of a winding up.
Separate legal personality
[19.05] It is trite law that the company is a distinct and separate entity from its members or shareholders: Salomon v Salomon & Co Ltd [1897] AC 22 . Hence, the owner of a timber estate who insured the timber in his own name rather than the name of the company of which he was the sole shareholder, did not have an insurable interest in the timber and could not claim under the policy: Macaura v Northern Assurance Co Ltd [1925] AC 619 . An unsecured creditor did not have an insurable interest as unsecured creditor whilst a secured creditor under a debenture had an interest in the company’s property by way of a charge, and could take out a policy on the company’s property: Macaura (above). The fact that one person holds all, or substantially all, of the shares in a company, does not, without more, make the company’s business that person’s business in the eyes of the law: Gramaphone and Typewriter Co Ltd v Stanley [1908] 2 KB 89 . A sole shareholder and director may also be employed by the company
Foreign companies
[19.06] Conflicts of law, viz. Vietnamese law – Singapore company suing Vietnamese company under a sale of goods agreement – Vietnamese company claiming agreement entered into by Singapore company with third party – whether third party is a separate legal entity from Vietnamese company
Interlocutory proceedings
[19.07] Sometimes, applicants for interlocutory proceedings such as a Mareva injunction or freezing order would plead for a lifting of corporate veil to reach assets of the defendant held by him in corporate entities: Pek Seng Co Pte Ltd v Low Tin Kee & Ors [1989] SGHC 83 ; J H Rayner (Mincing Lane) Ltd & Ors v Manilal & Sons (M) Sdn Bhd & Anor [1987] 1 MLJ 312. The law on injunctions is well settled. The two conditions that the applicant has to satisfy are: (a) a real risk of dissipation; and (b) the existence of assets within the control, or effective control of the defendant. In granting such an injunction, it would fly in the face of reality and common sense for a court to hold that the sole beneficial owner of the shares in a company was not indirectly the owner of the net assets of that company. He has full and untrammeled control, i.e. effective control to deal with or dispose of the assets and no one can stop or prevent him from doing so. Thus, the law in this area looks at effective control of the defendant over the assets and does not require a lifting of corporate veil to restrain him from dealing or dissipating those assets.
[19.08] In addition, discovery actions against overseas subsidiaries of multinationals, Shell and BP, for certain documents held by them in Zimbabwe and South Africa were disallowed even when these subsidiaries were wholly owned and controlled by their parent companies: Lonrho Ltd v Shell Petroleum [1980] QB 358, CA; [1980] 1 WLR 627, HL .
[19.09] In ancillary proceedings for discovery in a divorce action between the husband and wife, one party may seek to ascertain the full extent of the other party’s assets through a lifting of the corporate veil, where the assets are held in complexly structured offshore companies: Prest v Petrodel Resources Ltd & Ors [2012] EWCA Civ 1395; [2013] UKSC 34 . Per Lord Sumption: the concealment principle is based on the interposition of a company or several companies so as to conceal the identity of the real actors; cf the evasion principle which is grounded on the court disregarding the corporate veil if there is a legal right against the person in control which exists independently of the company’s involvement, and the company is interposed so that the separate legal personality of the company will defeat the right or frustrate its enforcement: Gencor ACP Ltd v Dalb [2000] 2 BCLC 734 ; Trustor AB v Smallbone (No 2) [2001] 1 WLR 1177 . The corporate veil would not be lifted if there was no impropriety on the part of the defendant. Furthermore, the same legal principle applies in matrimonial proceedings as it applies in general company law.
Confiscation of proceeds of crime
[19.10] Lifting of the corporate veil under the Proceeds of Crime Act 2002 (UK) for offences of corruption and fraud: R v Sale [2013] EWCA Crim 1306; [2014] 1 WLR 663, CA . Confiscation orders made in sums equal to turnover of companies during period of contravention by disqualified directors: R v Seager [2010] 1 WLR 815, CA ; R v Blatch [2009] EWCA Crim 1303; [2010] 1 WLR 815, CA ; R v Boyle Transport (Northern Ireland) Ltd & Ors [2016] EWCA Crim 19 for conspiracy to make false statements; considered R v Seager (above); R v Sale (above); R v McDowell [2015] 2 Cr App R(S) 14, CA
Lifting the corporate veil at common law
[19.11] In view of the corporate personality concept protecting its members and shareholders from liability to third parties, the opportunity for fraud exists in some instances. The courts have lifted the corporate veil on various grounds so as to hold the members/shareholders or Controllers personally liable for the debts of the company to its creditors or other third parties
Evading existing legal obligations
[19.12] The company was used to evade an existing contractual obligation: Gilford Motor Co Ltd v Horne [1933] Ch 935, CA ; Jones v Lipman [1962] 1 WLR 832, HC ; cf Adams v Cape Industries plc [1990] Ch 433, CA where arrangements to form separate companies in various jurisdictions for the mining and marketing of asbestos to take advantage of the corporate form (i.e. future legal obligations) were held to be a valid reason of the incorporators. The corporate veil was not lifted in The Andres Bonifacio [1993] 3 SLR(R) 71; [1993] SGCA 70, CA ; Miller Freeman Exhibitions Pte Ltd v Singapore Industrial Automation Association [2000] 4 SLR 137 ; Gerhard Hendrik Gispen & Ors v Ling Lee Soon Alex & Anor [2001] SGHC 350.
Fraud
[19.13] The company was used to commit fraud
Sham or façade
[19.14] The company was used as a sham or façade. A sham means “the acts done or documents executed by the parties to the ‘sham’ which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create”: Win Line (UK) Ltd v Masterpart (Singapore) Pte Ltd & Anor [2000] 2 SLR 98; [1999] SGHC 94 ; Children Media Ltd & Ors v Singapore Tourism Board [2008] SGCA 45 ; Sitt Tatt Bhd v Goh Tai Hock [2009] 2 SLR(R) 44; [2008] SGHC 220. It was held that for acts or documents to be a sham, with whatever legal consequences that follow from it, all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating
Agent or nominee
[19.15] The company was an agent or nominee of the controllers: Re FG (Films) Ltd [1953] 1 WLR 483, Ch D ; Win Line (UK) Ltd v Masterpart (Singapore) Pte Ltd & Anor [2000] 2 SLR 98; [1999] SGHC 94 ; Smith, Stone & Knight Ltd v Birmingham Corp [1939] 4 All ER 116, HC . In cases such as Smith, Stone & Knight Ltd (above) and DHN Food Distributors v Tower Hamlets London Borough Council [1976] 1 WLR 852, CA , where the issue is whether the claimant may claim compensation for premises compulsorily acquired by the relevant council, the English courts might be inclined to lift the corporate veil so as to prevent parties’ being deprived of compensation based on a legal technicality of separate corporate entity; cf Woolfson v Strathclyde Regional Council (1978) SLT 159; 38 P & CR 521 where on appeal from Scotland, the House of Lords disallowed the principal shareholder of a company to recover compensation for the compulsory acquisition of a property which the company occupied.
Alter ego
[19.16] The members/directors are the alter ego of the company: Win Line (UK) Ltd v Masterpart (Singapore) Pte Ltd & Anor [2000] 2 SLR 98; [1999] SGHC 94. In view of the common practice of setting up related companies or a group of companies with common shareholders and directors, the alter ego argument is often used to lift the corporate veil: New Line Productions Inc v Aglow Video Pte Ltd [2005] 3 SLR(R) 660; [2005] SGHC 118 where Tay Yong Kwang J held that the companies in the TS Group were not a loosely-knit group but were really little pieces of mosaic forming a complete mural, glued together by the four directing minds. In a British Virgin Island incorporated company for the sole purpose of receiving payment under the share acquisition agreement, the controller was sole director and shareholder of company and the “directing mind and will” of the company: Alwie Handoyo v Tjong Very Sumito & Ors [2013] SGCA 44 ; cf NEC Asia Pte Ltd (now known as NEC Asia Pacific Pte Ltd) v Picket & Rail Asia Pte Ltd & Ors [2010] SGHC 359 where mere evidence of sole shareholding and control of the company without more will not move the court to intervene.
Single economic unit
[19.17] The company was part of a group of associated companies (“single economic unit” argument): DHN Food Distributors Ltd v Tower Hamlets London Borough Council [1976] 1 WLR 852, CA ; cf Scottish decision in Woolfson v Strathclyde Regional Council (1978) SLT 159; 38 P & CR 521 ; Briggs v James Hardie & Co Pty Ltd (1989) 16 NSWLR 549 at 567 ; Prest v Petrodel Resources Ltd & Ors [2013] UKSC 34 ; Kosmopoulos v Constitution Insurance Co of Canada [1987] 1 SCR 2 ; AG v Equiticorp Industries Group Ltd (In Statutory Management) [1996] 1 NZLR 528 ; Cape Pacific Ltd v Lubner Controlling Investments (Pty) Ltd 1995 (4) SA 790, App Div at 802–803. The argument was rejected in Adams v Cape Industries plc [1990] Ch 433 , where a person in control of the company would be liable as if he were a co-contracting party with the company to a contract to which he was not a party and to which none of the parties had intended that he should be: VTB Capital plc v Nutritek International Corp & Ors [2013] UKSC 5; [2013] 2 AC 337; [2013] 2 WLR 398 ; Cavenagh Investment Pte Ltd [2013] SGHC 45 ; Manuchar Steel Hong Kong Ltd v Star Pacific Line Pte Ltd [2014] SGHC 181. The connectedness or closeness of the companies controlled by a single family did not indicate that they were a mere sham or façade: Simgood Pte Ltd v MLC Barging Pte Ltd & Ors [2016] SGCA 46 affirmed the High Court’s decision not to lift the corporate veil, reported in [2016] 1 SLR 1129; [2015] SGHC 303.
“where the justice of the case requires”
[19.18] Under “very exceptional circumstances”, the court might lift the corporate veil: TV Media Pte Ltd v De Cruz Andrea Heidi & Ors [2004] SGCA 29.
[19.19] Malaysia’s wider approach to lift the corporate veil “in order to do justice particularly where the element of fraud is involved”: Aspatra Sdn Bhd v Lorraine Esme Osman [1988] 1 MLJ 97 at 103, SC. See also Tengku Abdullah Ibni Sultan Abu Bakar v Mohd Latiff bin Shah Mohd [1996] 2 MLJ 265, CA ; cited Hotel Jaya Puri Bhd v National Union of Hotel, Bar & Restaurant Workers [1980] 1 MLJ 109 ; Golden Vale Golf Range & Country Club Sdn Bhd v Hong Huat Enterprises Sdn Bhd (Airport Auto Centre Sdn Bhd & Anor as third parties) [2005] 5 MLJ 64, HC. The concept of “justice of the case requires” is often mired with other grounds like equitable fraud, or mere façade concealing the true facts or to prevent the abuse of corporate legal personality: see Perman Sdn Bhd & Ors v European Commodities Sdn Bhd & Anor [2006] 1 MLJ 97 at 109, CA. Corporate veil lifted on “special circumstances” of the case: RDS Bina Sdn Bhd v Ong Chin Hoe & Anor [2014] 11 MLJ 606. The case is notable as it decided that “directing mind” includes a “sleeping partner” playing a passive role in the company. The solicitor was in breach of his fiduciary duty to his client, and in doing so had unjustly enriched himself. The company set up to hold the land was his “alter ego”. Corporate veil was lifted in Gurbachan Singh s/o Bagawan Singh & Ors v Vellasamy s/o Pennusamy & Ors and Other Appeals [2015] 1 MLJ 773. The Federal Court decided that “it is now settled law in Malaysia that the court would lift the corporate veil of a corporation if such corporation was set up for fraudulent purposes, or where it was established to avoid an existing obligation or even to prevent the abuse of a corporate legal personality”. As to what constitutes fraudulent purposes, it has been described as to include actual fraud or fraud in equity. Fraud in equity occurs in cases where there are signs of separate personalities of companies being used to enable persons to evade their contractual obligations or duties. For tort of conspiracy and lifting of the corporate veil, see Deepak Jaikishan a/l Jaikishhan Rewachand & Anor v Intrared Sdn Bhd (previously known as Reetaj City Centre Sdn Bhd and formerly known as KFH Reetaj Sdn Bhd) & Anor [2013] 7 MLJ 437.
[19.20] Corporate veil not lifted in Mackt Logistics (M) Sdn Bhd v Malaysian Airline System Bhd [2014] 2 MLJ 518 ; applied Tenaga Nasional Bhd v Irham Niaga Sdn Bhd & Anor [2011] 1 MLJ 752, CA ; Law Kam Loy & Anor v Boltex Sdn Bhd & Ors [2005] MLJU 225; [2005] 3 CLJ 355, CA. Lifting of the corporate veil has to be specifically pleaded: Pamol (Sabah) Ltd & Anor v Joseph bin Paulus Lantip & Ors [2012] 5 MLJ 616, CA ; ATA Management Consultants Sdn Bhd v Makmuran Sdn Bhd [2004] 3 CLJ 53, CA ; Ong Thean Chye & Ors v Tiew Choy Chai & Anor [2011] 4 MLJ 616, CA.
Admiralty jurisdiction
[19.21] The courts recognise the established practice for shipping companies to set up and utilise one-ship companies to limit liabilities: The Andres Bonifacio [1993] 3 SLR(R) 71; [1993] SGCA 70, CA. It would not lift the corporate veil unless the circumstances were exceptional, such as where a façade or situation was shown where deliberate fraud had been perpetrated through fictitious transactions or through the vehicle of non-existent companies: The Skaw Prince [1994] 3 SLR(R) 146; [1994] SGHC 18. Directors who were the controlling or majority shareholders of the defendant companies, without more, would not be enough to lift the corporate veil
Directors liable for tort committed by the company
[19.22] Where directors order an act by the company which amounts to a tort by the company, they may be liable as joint tortfeasors on the basis that they have “procured or directed” the wrong to be done: see s 119(4) of the Copyright Act (Cap 63); New Line Productions Inc v Aglow Video Pte Ltd [2005] 3 SLR(R) 660; [2005] SGHC 118. In Hoffman-La Roche & Co AG v Sieczko [1968] RPC 460, CA , an action for infringement of a patent for a drug known as diazepam (or valium) by Intercontinental Pharmaceuticals (Bletchley) Ltd (“ICP group”) was allowed against another company within the group called ICP (Eire) Ltd, an Irish company within the same group. For “lifting the corporate veil” in a tort of negligence action: TV Media Pte Ltd v De Cruz Andrea Heidi [2004] SGCA 29. Further, see cases under tort committed by a company.
Reckless and fraudulent trading
[19.23] There are several statutory exceptions to the separate entity doctrine. They are ss 339(3) and 340(1) of the Act. Instances where the directors may become personally liable to creditors for the amount of debts due to them would be where the board of directors declared dividends under s 403(1) when there are no available profits out of which to pay them. See Lama Tile (Timur) Sdn Bhd v Lim Meng Kwang & Anor [2015] 4 MLJ 85 and other cases cited under ss 339 and 340.
May sue and be sued in its own name
[19.24] A company is distinct from its owners and directors. Hence, any legal action that belongs to the company has to be taken in the name of the company. This principle known as the “proper plaintiff” rule was enunciated in Foss v Harbottle (1843) 2 Hare 461 , Vice-Chancellor’s Court; Rainham Chemicals Works Ltd v Belvedere Fish Guano Co Ltd [1921] 2 AC 465 .
[19.25] In exceptional circumstances, a court may allow a shareholder to sue in the company’s name and on its behalf. This is called a derivative action. There is a derivative action at common law and the other called the statutory derivative action under s 216A of the Act. The four exceptions to the rule in Foss v Harbottle are:
(a) the act complained of is ultra vires or illegal;
(b) the matter is one which could validly be done or sanctioned by some special majority of members;
(c) the personal rights of the members have been invaded; and
(d) the acts complained of are a “fraud on the minority” and the wrongdoers are themselves in control of the company.
Statutory derivative actions
[19.26] These exceptions will be discussed under s 216A.
Liability for tort
[19.27] Tort liability is often levied against the company on two grounds: (a) the company may be primarily liable for the tort, just as a natural person might be, and the usual consequences will follow. It is necessary to identify the person(s) whose acts will count as the acts of the company; and (b) the company is vicariously liable for the tort which its employee or agent committed. Hence, a company may sue for defamation that it procured supplies from the black market: D and L Caterers Ltd and Jackson v D’Ajou [1954] KB 364, CA. A company is entitled to protection from the invasion of privacy
Primary liability
[19.28] A company may be liable in tort for unlawful acts: Campbell v Paddington Corp [1911] 1 KB 869, KBD . Injunctions granted against four companies for contravention under s 35(1) of the Restrictive Trade Practices Act 1976 (UK) which was flouted by their employees, rendered the company liable for contempt of court: Director General of Fair Trading v Pioneer Concrete (UK) Ltd & Anor [1995] 1 AC 456, HL; [1992] 2 QB 213, CA ; flouted by a passive director who had neither aided nor abetted any breaches of the injunctions or undertaking: Director General of Fair Trading v Buckland & Anor [1990] 1 WLR 920 . Tort of inducement to breach contract: SV Beverages Holdings Sdn Bhd & Ors v Kickapoo (M) Sdn Bhd [2008] 4 MLJ 187. Criminal action for common law conspiracy to defraud: R v ICR Haulage Ltd [1944] KB 551 , Court of Criminal Appeal where acts of the managing director were acts of the company
Knowledge and acts of company
[19.29] When liability attaches to a company arising out of the company’s knowledge of certain facts or information, the question whether and in what circumstances knowledge should be imputed to a company is of considerable difficulty. In any area of activity where the members or the directors competent to act by informal unanimous agreement, knowledge of a matter communicated to all concerned could readily be attributed to the corporate body. But where it is just one or more individuals, whether officers, agents or employees, the test applied is often “the directing mind and will” of the company, if there is an individual whose relationship with the company can be described as such: see El Ajou v Dollar Land Holdings plc [1994] 1 BCLC 464 where the knowledge of the chairman that the money that was received were the proceeds of a fraud was attributed to the company. The fault of the registered managing owner who managed the ship on behalf of the owners was imputed to the owners: Lennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915] AC 705, HL ; cf Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 AC 500, PC where K, the chief investment officer of an investment management company, and N, its senior portfolio manager, with the company’s authority but unknown to the board of directors and managing director, used funds managed by the company to acquire shares in a public issuer. The company thus became for a short period a substantial security holder in that public issuer, but the company did not give notice thereof as required by s 20(3) of the Securities Amendment Act 1988 (New Zealand). The Securities Commission instituted proceedings in the High Court of New Zealand against the company for failing to comply with s 20. The Privy Council held that having regard to the policy of s 20 of the Securities Amendment Act 1988 (New Zealand), on the true construction of s 20(4)(e), the appropriate rule of attribution to be implied was that a corporate security holder knew that it was a substantial security holder in a public issuer when that was known to the person who had acquired the relevant interest with the company’s authority, whereupon the company was obliged to give notice under s 20(3); and that, accordingly, K’s knowledge of the transaction was attributable to the company irrespective of whether he could be described in a general sense as its directing mind and will, and so in failing to give notice the company had been in breach of its duty under s 20(3).
[19.30] Or approached from the question of authority or agency, whether actual or ostensible of the individuals given by the company: Regina Fur Co Ltd v Bossom [1957] 2 Lloyd’s Rep 466 . A director’s knowledge, in so far as it was acquired outside the course of his directorship in a company, e.g. qua director of a connected company, could not be attributed to the company via the law of agency simply because of his common directorships
